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Experts question Google phone business model

Nancy Gohring | March 5, 2010
While the idea is admirable, it's probably not possible to execute in the U.S., they say

People can buy an unlocked version of the current Nexus One phone and use it on T-Mobile's network or AT&T's network but not AT&T's 3G network.

The claim that it's an unlocked device is not untrue, but it's not particularly reflective of reality" because using the unlocked phone on AT&T's network without being able to use 3G is not a very attractive proposition, said Castonguay.

Analysts also say it's a stretch to say that Google's model is better for customers.

I'm not sure that new in this context means better. In fact, in many ways they've taken a step backwards, said Castonguay.

That's because buyers of Google's Nexus One phone will pay more if they change their minds about the phone.

Nexus One users who cancel their contract with T-Mobile in under four months must pay T-Mobile a US$200 cancellation fee and they must pay Google an additional $150 fee. That gives the Nexus One the most expensive cancellation fee for any T-Mobile phone.

It is the highest ETF because in most cases people with a T-Mobile phone only pay $200, not an additional $150 to Google, said Chris Hazelton, an analyst with the 451 Group.

Google charges customers that fee because T-Mobile pays it a commission for each Nexus One subscriber and asks Google to return that commission should the customer cancel their contract within four months, Google said in the filing.

Most retailers, like Best Buy, also get commissions from operators for selling wireless services and must repay an operator for that commission if a customer cancels service within a specified time period, Castonguay noted. However, retailers absorb that repayment rather than charge the customer for it, he said.

Google is doing something unusual in offloading their risk in that equation, Castonguay said. They are doing this in a way that is highly risk averse. They are in a position where the risk of cancellation is born almost entirely by the customer.

Some retailers construct their contracts in such a way that they don't get paid a commission unless a customer sticks with the contract for a certain period of time, thus eliminating the potential issue of having to return a commission, Nogee said. He finds it unusual that Google would have to repay a commission.

A Google spokeswoman did not explain why Google passes that charge on to consumers while other retailers don't.

Another unusual move from Google is its decision to use a new term for its cancellation fee.

"Google is not a wireless network operator, does not enter into contracts for mobile service plans with customers, and does not charge an 'early termination fee' (ETF) to consumers based on contractual terms in a mobile service plan related to early cancellation," it wrote in the filing.


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